Impact of business diversification on South African construction companies’ corporate performance

Abstract

Purpose – The purpose of this paper is to investigate and examine whether there is any significant relationship between the extent of business diversification and the performance of construction firms in South Africa. The rationale for the examination stems from the view that the relationship between diversification and the performance of construction firms raises important issues in strategic management and cross-border business. In contractors’ growth however, there is a dearth of empirical research and theoretical arguments regarding the effects of business diversification on construction company performance in South Africa. Design/methodology/approach – The study employed the use of a case study and archival approaches using semi-structured interviews to elicit primary qualitative and quantitative data over a period of five years for large construction companies listed in Grade 7-9 on the Construction Industry Development Board (cidb) contractor register. The scope of services and geographic diversification are computed from the sourced data. Dependent variables are the measure of performance using Return on Total Asset (ROTA), Return on Capital Employed (ROCE) and Profit Margin (PM); independent variables used are service/Product Diversification (PD) and Geographic Diversification (GD); while control variables used are size, age, technical capability and capital structure of the construction firms. Findings – It emerged that established construction companies on the cidb contractor registers perform and diversify more in their service/product better than the newly upgraded contractors and this was evident in their performance with respect to profit margin. The results also indicated that there are no statistically significant differences in the performance of diversified and undiversified firms, although diversification was found to have a positive impact on the corporate performance of construction companies. Originality/value – The outcomes of the research are useful to decision makers and managers of construction companies, as they will help in making viable corporate strategic diversification decisions. The study also engenders a better understanding of the effect of both product and geographic diversification on the performance of contractors